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Fixed deposits are considered one of the safest
investment portfolios offered by banks. They pay higher than money market or
savings account without the attendant risks. To invest in such a secure
portfolio the company or individual will have to deposit the money for an
agreed duration.

The banks are able to pay high premium because they have
time specific access to the funds and are able to use them unhindered. It is
possible to get the funds un-locked early however this will attract sever
penalties and charges.

How Does Fixed Deposits Work

Fixed deposit are
time based deposits that attract higher interest than regular saving deposits.
In return for higher interests the depositor locks the funds in the bank for a
specified period agreed by both parties. The party promises to keep the funds
in the bank for a specified period. Fixed deposit tenors usually run from six
months, eighteen months, one year, two years or five years. The longer the
duration the higher the interest rate it attracts.

•Time based

•Attract
higher interest

•Funds are
locked

Why Consider Fixed Deposit

The main reason to consider fixed deposits is higher
rates. The bank agrees to pay higher rates due to the company or individuals
promise to keep the funds for a specified period.

As stated earlier the interest is higher than regular
saving deposit accounts. Another advantage is higher annual percentage yield on
the funds deposited. Banks can offer this higher rates because they use the
funds long term in other investments or long term loans.

Fixed deposits attract term options on how long the funds
are kept. The depositor cannot withdraw the funds on short notice and is
encourage to run the full term.

The time period the funds are kept is referred to as
term. Common term are six months, twelve months, eighteen months and sixty
months.

Long Term

The longer the term the better prospects for interest.
Longer terms generally attract higher interest than shorter term. Although
longer term are not entirely better the terms and conditions should be properly
understood.

Maturity Date

All fixed deposits have a maturity date when the
investment is credited to the investor. At the end of the fixed deposit term
the deposit is said to mature. The bank notifies the depositor as the fixed
deposit term is about to expire.

The bank provides several options for the depositor. The
depositor could consider the options or opt out of the fixed deposit. If the
investor decides to do nothing the bank will automatically re-invest the said
amount in another term similar to initial term.

If the fixed deposit was for one year the bank will
re-activate another one year term on the deposit. The problem with this is the
amount of interest may vary from previous agreement.

The interest could mark-up or down based on the banks
portfolio. There is no guarantee that the same rate offered by the bank stands.
It is important to let your bank know your intentions before the term ends.

The fixed deposit owner has a few options at end of term.
The company or individual could re-invest in another fixed deposit or withdraw
the money into a savings account. They can consider a shorter or longer term or
re-invest.

•Re-invest
funds

•Withdraw

•Consider shorter
deposits

How to use Fixed Deposit

To use a fixed deposit the person needs to first contact
the bank. There are two options online banks or brick and mortar banks.

You need to call their customer service or visit the bank
branch. Make sure you conduct due diligence and investigate the bank before
depositing your money.

Things to Ask

Ask the bank about different types of fixed deposit. Find
out about early withdrawals, penalties and alternative fixed deposit products.
Find the one that fits your needs with more features and flexibility.

•Different
types of fixed deposits

•Penalty on
early withdrawal

•Alternative
fixed deposits

•flexibility

Strategies of using Fixed Deposits

Long term fixed deposits seem more attractive because of
high interest rate. However they attract huge penalties if the deposit does not
run the full term. Make sure you determine the right fixed deposit before
investing.

Long term fixed deposit locks your funds for extended
periods without access to the depositor. If you are ready to lock your funds
for such extended period then long term is your best bet.

Sometimes an individual could buy a fixed deposit when
the interest are low and is stock with low paying fixed deposit. A good
strategy is to use short term deposits and re-invest when interest rates
increase. It is important to use fixed deposits that offer flexibility.

Another technique is the ladder system to increase and
optimize fixed deposit. An investor could take different fixed deposits with
different terms to guarantee regular money at internals.